The Greek debt crisis has prompted a surprising number of references to an obscure agreement signed in London 60 years ago. The 1953 London Debt Agreement (LDA) marked the end of a long period of German default on external debt owed to both governments and private entities. The LDA cut the debt roughly in half, rescheduled what remained, and tied repayments to export revenues. Greece, in one of history’s great ironies, signed the LDA as a creditor nation. Prime Minister Tsipras has argued that Germany should appreciate the lesson of 1953 and offer similar debt forgiveness to Greece today.Which ignores that West Germany was central to the free world's resistance to international Communism. While Greece hasn't been the center of anything for over 2,000 years.
The LDA reflects two distinct deals. The occupying governments agreed to reduce money owed to them by Germany because of post-WWII assistance programmes, including the US ‘Marshall Plan’. This part of the agreement was simple, as debts incurred in the late 1940s did not entail complex issues of currency valuations or interest rates, and the only relevant parties were the four governments.Which governments needed the potential military contributions of a reinvigorated Germany if war broke out with Russia and its Warsaw Pact allies.
The remaining German debt arose from pre-WWII borrowing, and posed complex issues. Much of the debt reflected bonds issued by German government entities and purchased by private investors elsewhere. Other debt reflected borrowing by German firms.Which entailed some tricky questions due to 'gold clauses' in those loan contracts, but FDR had shown how to ignore those back in the 1930s in Depression era America. Anyway;
The agreement included two provisions designed to make sure payments did not ruin the German economy.And as for today's Greek economy;
Opponents of Greek debt forgiveness worry about moral hazard; if the Greeks get off, why should the Portuguese pay? There was little such concern in 1953. Germany was not the only government that had failed to meets its debt-service obligations, but it was the only one in a position to expect help by virtue of its importance.Germany was too big to let fail back then.
The bondholders’ identity poses another problem today. Much of Greece’s debt today is held by European governments or the ECB. These governments have their own fiscal challenges and their taxpayers are in no mood to provide fiscal subsidies to maintain a currency union. Intense press interest means that any offer (or eventual deal) will be widely reported, almost immediately, and will have political repercussions in Athens, Berlin, and elsewhere.Today's Europeans aren't preoccupied with mourning the millions of those who died in war, nor with rebuilding bombed out cities. So, Greece, take another look at your cards.